Guosen Securities released a research report stating that it maintains its "outperform" rating on Hua Hong Semiconductor (01347) and is bullish on the long-term prospects of domestic specialty process wafer foundry. According to the company's guidance, it has slightly adjusted its capacity forecast and expense rate, and is expected to achieve revenue of 1.992/2.375/2.842 billion US dollars and net income of 0.108/0.203/0.419 billion US dollars from 2024 to 2026 (formerly 2.038/2.438/2.837 billion US dollars and 0.135/0.24/0.397 billion US dollars respectively).
Guosen Securities' main points are as follows:
Gross margin was slightly better than expected in 2Q24, and is expected to increase quarter-on-quarter in 3Q24.
The company released unaudited financial results: in 2Q24, it achieved sales revenue of 0.479 billion US dollars (YoY -24.2%, QoQ +4.0%), which is in line with the guidance (0.47-0.5 billion US dollars). The gross margin was 10.5% (YoY -17.2pct, QoQ +4.1pct), which slightly exceeded the guidance (6%-10%). Both revenue, gross margin, and capacity utilization rate achieved QoQ growth. The company expects to achieve sales revenue of approximately 0.5-0.52 billion US dollars and gross margin of approximately 10%-12% in 3Q24. The mid-value of both revenue and gross margin guidance has improved QoQ. Increased ASP and shipment volume will serve as driving forces for growth.
Wafer delivery volume increased by 7.8% quarter-on-quarter, and capacity utilization rate rebounded to 97.9%.
As of the end of 2Q24, the company's equivalent 8-inch monthly capacity was 0.391 million pieces, the same as at the end of 1Q24. 2Q24 shipped equivalent of 8-inch wafers were 1106 thousand pieces (YoY +3.0%, QoQ +7.8%), and the capacity utilization rate continued to increase to 97.9% (YoY -4.8pct, QoQ +6.2pct). Among them, the revenue from 8-inch wafers was 0.245 billion US dollars (YoY -32.0%, QoQ +2.3%), and the capacity utilization rate was 107.6% (QoQ +7.3pct); revenue from 12-inch wafers was 0.233 billion (YoY -13.7%, QoQ +5.9%), and the capacity utilization rate was 97.9% (QoQ +6.2pct).
Consumer electronics, industry and autos as well as computers all increased quarter-on-quarter, while demand for communications was flat.
Divided by terminal market, revenue of electronic consumer products, industrial and automotive products, and computers increased QoQ, with corresponding growth rates of 3.6%, 7.9%, and 22.9%, while revenue of communications products decreased QoQ by 2.8%. Divided by technology platform, revenue of embedded non-volatile storage and discrete devices increased QoQ by 15.28% and 6.51%, respectively, while revenue of independent non-volatile storage decreased QoQ by 23.81%. Divided by process technology node, revenue of 90nm and 95nm, and 0.35um and above increased by 7.65% and 8.96%, respectively. The demand for RF, image sensors, and power management integrated circuits (BCD) is mainly driven by AI-related demands to achieve growth.
The new factory in Wuxi is expected to enter the trial production stage by the end of 2024, and the additional depreciation will be reflected in 2025.
The company's capital expenditure in 2Q24 was US$0.197 billion, of which Hua Hong’s 8-inch line was US$0.028 billion, Hua Hong Wuxi was US$0.04 billion, and Hua Hong Manufacturing was US$0.128 billion. According to Shanghai Construction Group, Hua Hong Wuxi Manufacturing Project achieved comprehensive construction sealing ahead of schedule on April 20th. The company expects the new 12-inch line to enter the trial production stage by the end of 2024, and is expected to have a monthly capacity of 0.02 million pieces by the end of 2025. Therefore, the bank expects the company's capital expenditures from 2024 to 2026 to accelerate, and the launch of two new wafer production lines will also bring in depreciation increase.
Risk warning: downstream demand slows down; new process introduction is slower than expected; expansion is slower than expected.